November 22, 2016

Demonetisation has turned India into world’s fastest slowing economy

Has government bitten more than it can chew via demonetisation? Has PM Narendra Modi bartered graver tangible hit to the economy and masses against little and vague long-term gains? How to weigh the gains and losses of this huge reset minus rhetoric?

As dreaded, demonetisation has started radiating its pain across the economy and by and large, Parliament debates have failed to convince the nation on gains and losses of this exercise. It is high time now to take a critical look at this massive disruption.

First, let’s get down to the facts:

1) Various independent estimates indicate that around 20 per cent of the black money is in cash possession while the rest is parked in land and jewellery.

2) Demonetisation against the black economy is largely limited to inflicting penalties on those who hold their black wealth in the form of cash at the moment of demonetisation.

3) Demonetisation has effectively wiped off 80 per cent of the currency in circulation although India trades and spends mostly in high denomination bills. This currency has to come for exchange in banks and other exchange centres.

4) India’s 11.8 per cent of economy deals in cash. India’s cash-to-GDP ratio is more or less parallel to many big economies. Germany’s cash-to-GDP ratio comes in at 8.7 per cent while the same ratio in France is at 9.4 per cent. Japan has 20.7 per cent cash economy.

5) As we know that cash economy is a complex mix of black and white transactions and cash generated through illegal means is also used in the creation of productive assets and demand, let’s give the cash economy a coherent classification.

Cash economy consists of two types of cash: accounted and unaccounted. Cash can become legal only when it is accounted either in tax or in the bank account. Whatever cash stays out of these accounts can be called unaccounted or black.

6) Whatever size one may estimate for the black economy, so far as the cash economy is concerned, it is perfectly measured and recorded by the Reserve Bank of India on a quarterly basis. Since the RBI keeps a record of every currency note printed, the data of the notes in circulation is synonymous with the cash economy.